World Bank Document

Document of The World Bank FILECOPY

FOR OFFICIAL USE ONLY Public Disclosure Authorized

Report No P-2 576-PA

REPORT AND RECO(4ENDATION

OF THE

PRESIDENT OF THE

INTERNATIONALBANK FOR RECONSTRUCrION AND DEVELOPNENT

Public Disclosure Authorized TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

TO THE

REPUBLIC OF PARAGUAY

FOR A

Public Disclosure Authorized SIXTH HIGHWAYPROJECT

June 4, 1979 Public Disclosure Authorized

This document has a restricted distributionand may be usedby recipients only in the performance of their official duties. Its contentsmay not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS

US$1.00 0 126 a 1.00 US$0.008 # 1,000 US$7.94 $ 1,000,000 US$7,937

GLOSSARY OF PRINCIPAL ABBREVIATIONS USED IN THIS REPORT

DGV - Directorate General of Highways IDB - Inter-American Development Bank OCIPT - Office of Coordination and Integral Planning of Transport

GOVERNMENT OF PARAGUAY

FISCAL YEAR

January 1 - December 31 FOR OFFICIALUSE ONLY

PARAGUAY

SIXTH HIGHWAY PROJECT

Loan and Project Summary

BORROWER: Republic of Paraguay

AMOUNT: US$39.0 million equivalent.

TERMS: Repayable in 17 years, including 4 years of grace, at 7.9% interest per annum.

PROJECT DESCRIPTION: The proposed project would assist the Government in (a) providing road infrastructureto support the rapid agricultural development of the southern Alto Parana and Itapua regions, in the hinterland of the Parana river; (b) improving the Government'scapacity to meet increasing requirementsfor feeder and rural roads and develop better methods for the design, constructionand maintenanceof such roads; and (c) pursuing the objectives of the Fifth Highway Project for improving transport sector management. The primary highway and the complementaryfeeder roads to be constructedunder the project would support future rural developmentefforts and would acceleratethe rate of expansionof the agriculturalfrontier along the Parana river. Readily quantifiablebenefits would be a substantial reduction in transport costs, and an increase in agriculturalproduction in the area. The project would contribute to institution-buildingwithin the Ministry of Public Works and Communications: the feeder roads component would provide overall support to agriculturalprograms, while thieOCIPT componentwould help improve transport planning within the Ministry; DGV's staffing capabilities would be improved to enhance the Ministry's effectiveness. The constructionworks do not present special risks in view of the relatively standard nature of the roads and the fact that the bulk of engineeringwork is now complete. The assumptionsunderlying the economic analysis are sufficientlyconservative so that future increasesin agriculturalproduction (includingincreases resulting from the project) are not in question. A higher element of risk is attached to the institution-buildingobjectives: the stretngtheningof DGV's management capabilitiesand of OCIPT's transportplanning functionsare long-termprocesses depending largelyupon the availabilityof qualified professionalstaff; special attentionhas been placed under the project to measures addressed to bringing a permanent solution to the Ministry's staffing problems.

This documewnthas a restricteddistribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - ii -

ESTIMATED COST: Investment Category Local Foreign Total ------(US$ million)------

Construction of the Pirapo- Ciudad Pte. Stroessner Road (Route No. 6) about 180 km 11.23 27.10 38.33

Construction of about 500 km of Feeder Roads 2.26 4.47 6.73

Technical Assistance (i) Feeder Roads Unit 1/ 0.38 1.62 2.00 (ii) DGV 0.12 0.46 0.58 (iii) OCIPT 0.06 0.24 0.30 (iv) Survey of road materials 0.30 0.30 0.60 Sub-total 0.86 2.62 3.48

Contingencies Physical 1.11 2.90 4.01 Price 7.54 5.41 12.95 Sub-total 8.65 8.31 16.96

TOTAL 2/ 23.00 42.50 65.50

FINANCING PLAN: Local Foreign Total -----(US$ Million)------

Government 19.5 - 19.5 Private Bank 3.5 3.5 7.0

Bank _ 39.0 39.0

TOTAL 23.0 42.5 65.5

ESTIMATED DISBURSEMENTS: FY 1980 1981 1982 1983 1984 1985 ------…(US$ Million)…------

Annual - 1.5 12.0 13.0 9.5 3.0 Cumulative - 1.5 13.5 26.5 36.0 39.0

ECONOMIC RATE OF RETURN: 18%.

APPRAISAL REPORT: Report No. 2455b-PA, dated June 4, 1979

1/ Including office equipment and vehicles.

2/ In line with Government regulations, most project-related expenditures are exempt from taxes and duties. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

REPORT AND RECOMMENDATION OF THE PRESIDENT TO TH'EEXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF PARAGUAY FOR A SIXTH HIGHWAY PROJECT

1. I submit the following report and recommendation on the proposed loan to the Republic of Paraguay for the equivalent of US$39.0 million to assist in financing the Sixth Highway Project. The loan would have a term of 17 years including 4 years of grace, with interest at 7.9% per annum.

PART I - THE ECONOMY I/

2. An economic mission visited Paraguay in October 1978 and the up- dating ecoriomicreport, covering short- and medium-term developments, has been distributed to the Executive Directors ("Economic Memorandum on Paraguay" (2461-PA), M4ay 1979).

Economic Performance

3. Paraguay is endowed with vast areas of unutilized lands well-suited for agriculture or livestock, and has substantial hydroelectric potential. Despite these natural resources, progress has been held back by weak public institutions in the development area, remoteness from foreign markets, scattered population, and a weak transport network. The private sector still consists mainly of small traditional firms, and the role of the public sector in the economy is limited. For many decades, per capita income and employment .grew slowly and emigration served as an outlet for unemployed and under- employed manpower. More recently, however, the economy has been growing rapidly and many Paraguayans who had emigrated to neighboring countries have returned, responding to the expanded employment opportunities associated with the construction of the Itaipu dam. Furthermore, the expansion of the agricultural frontier has encouraged the immigration of farmers from abroad. Nevertheless, the country's population density remains very low in relation to agricultural land.

4. Ihe economic potential of the country began to be more fully realized during the 1970's with the rapid expansion of land under cultivation and the beginning of the exploitation of the enormous hydroelectric potential

I/ Paragraphs 3-13 are identical to the ones contained in the President's Report: for the Livestock and Agricultural Development Project (Report P-2482-PA of March 7, 1979). -2 - of the stretch of the Parana River along the country'sborder with Brazil and Argentina. A rise in external demand and favorableprices were instru- mental in acceleratingagricultural growth. The effectivesupply response of Paraguayan agriculturehas been assisted by improvementsin transport and implementationof a comprehensiveset of programs designed to increase and diversify agriculturalexports. The agriculturalgrowth of recent years has brought about an improvementin the real incomes of the rural population, which comprisesabout three-fifthsof the total. A significantshare of production of tobacco, cotton, and soybeans,which account for most of the recent expansion, is grown by small farmers who have received land under the Governmentand privately sponsoredcolonization programs. Roughly 25% of agriculturalworkers have benefitted from these land settlementefforts. Moreover, recently,rural wages have increasedsharply in some areas where demand for agricultural labor has exceeded supply. Thus, the benefits of agriculturalprogress have been fairly widely shared. This has reduced rural-urbanmigration. Per capita income grew at 5.2% per annum during 1972-78 compared to the 1.2% averaged during the previous 30 years. Growth in per capita incomes has been accompaniedby other improvementsin the standard of living as life expectancy and literacyhave increased,and infant mortality has declined. Nutritional levels are comparable to those found in countrieswith higher per capita incomes. Furthermore,in recent years, the Government has started to carry out a series of programs aimed at extending social and other back-up services, financial support, and technical assistance to existing and new land settlements. These programs should help in spreading the benefits of growth even more effectivelyamong the poorer segments of the population.

5. Exploitationof the country's hydropower potential has been facil- itated by treaties signed with Brazil and Argentina to form two binational authorities for the constructionand operation of two or more hydroelectric plants aggregatingat least 17,000 MW. Constructionof the Itaipu dam with Brazil, the largest ever built, has begun and is on schedule. Paraguay's economy is now in the midst of a rapid transformationspurred mainly by agriculturalexpansion and constructionactivity on the Itaipu dam. The rapid growth of agriculturehas continuedunabated in 1977-78, and, together with the reactivationof agroindustrialactivity in the wood and beef sectors, has resulted in accelerationof the GDP growth rate to over 9% in 1977-78 (as compared to 6% in 1975-76). These developmentshave been accompaniedby increased foreign capital inflows, a notable expansion of investment levels, and an accelerationof economic growth.

6. Growth has been accompaniedby relative price stability. The rate of inflationwhich reached 22% in 1974 deceleratedto 8% in 1975 and 6% in 1976 because of austere monetary and fiscal policies as well as the tapering off of price increases for imports and exports. The rapid increase in the money supply generated by large capital inflows associated with the construction of Itaipu dam and buoyant domestic demand resulted in a moderately higher inflation rate of 7.9% in 1977 and about 12% in 1978. While con- tractionaryfiscal policies have helped in easing inflationarypressures, these policies alone cannot be an effective instrument for this purpose given - 3 - the relatively small role of the Central Goverrment in the economy and the effects of the expansive forc:es,including the effects of foreign inflation. Moreover,undue reliance on such a policy could jeopardizethe implementation of importantdevelopment projects and social services. In the circumstances, the authoritiesare relying on the opennessof the Paraguayaneconomy, which enables imports to act as an effectiveregulating mechanism to domesticdemand pressures. However, there is little that a small, price taking country like Paraguay can do to insulate itself from the effects of foreign inflation.

7. The buoyant economy and measures introduced to improve the effi- ciency of tax administrationhave reversed the declining trend in the ratio of Central Governmentrevenues to GDP during 1974-76, raising the ratio from 9.0% in 1976 to over 10% in 1978. The Governmentcontinued to maintain a tight rein on expenditures,which have remained at about the same proportion of GDP during the last five years. Thus, Central Government savings increased during 1977/78. Several large projects initiated during 1974-76 were completed so that public sector investmentdeclined from its peak of 6.4% of GDP in 1976 to about 4.5% in 1978. Net external financingexceeded the reduced financingrequirements allowing the Governmentto reduce its debt outstanding to the monetary authorities.

8. I)espitesubstantially higher imports in 1977 (US$360million, up from US$236 million in 1976 mainly as a result of capital goods), Paraguay's registered trade deficit increasedfrom US$56 million in 1976 to only US$81 million in 1977, owing entirely to rapid expansionof agriculturalexports. The trade deficit is estimatedto have widened further in 1978, as imports continued to grow at a rapid pace and the country suffereda 40% loss of the soybean crop due to bad weather. Although trading partner data suggest that these registered figuresmay be underestimatedby as much as 50%, there is no question that increasedpubLic and private capital inflows,mainly associated with the constructionof the hydroelectricproject, have more than offset the current account deficit and added to the level of reserves. Foreign exchange reserves have thus increased from US$150 million at the end of 1976 to about US$440 million by December 1978.

Economic Prospects

9. Given the availabilityof still abundant land resources,a favorable investmentclimate, a relativelyfavorable price outlook for major agriculturalexports and the constructionof the hydroelectricprojects, Paraguay's prospects as regards the balance of payments and growth over the foreseeable future are good.

10. The country's development strategy aims at sustaining the growth momentum of agricultureand agroindustry,giving high priority to land settlement and to the provision of transportinfrastructure to facilitatethe flow of goods to domestic and foreignmarkets. The Government is carrying out a program to assist farm settlers in increasing their productivity, and is expanding credit for agricuLture and agroindustries. In the case of small farmers, the emphasis is on the consolidationof existing colonization - 4 - schemes and the establishment of some additional ones. Through foreign private investment and credit programs, the Government hopes to encourage the concurrent development of industries, particularly those with high value-added and dependent on domestic primary production.

11. The authorities are aware that the on-going boom in private investment and the prospect of continued high rates of GDP growth will call for greater public investment in supporting infrastructure as well as increased expenditure for education, health, rural development and other development- related services. The needed acceleration of public capital formation will require new tax measures, pending substantial transfers from power export earnings to the Central Government, to ensure the generation of the necessary additional internal resources. At the same time, higher current expenditures in the public sector will be required to improve effectiveness and broaden the scope of public action in the social sectors.

12. The level and pattern of public investment that could be achieved during the next five years will also depend on the technical and administrative capacity of the public sector to prepare and implement projects. Although improvements have been made in the planning mechanism in recent years, a bigger public sector investment program would require a large number of well-prepared projects. There is a need, therefore, for upgrading the technical aspects of project identification and preparation, and for devoting increased attention to enhancing the administrative capacity of public sector institutions. A broader investment effort will require streamlining and decentralizing the decision-making process. Moreover, salaries of scarce professional staff need to be adjusted upwards to compete effectively with the increased demands of the private sector and the binational power companies for their services. Given the institutional difficulties and the urgent need for greater public investment to support higher levels of private economic activity, substantial external technical assistance will be needed to bolster the institution-building process.

13. With the expected acreage expansion and continued construction of the hydroelectric projects, the economy could grow at an average annual rate of about 10% during 1979-83. Because of agricultural growth and favorable international prospects for cotton and soybeans, real exports are projected to grow at 13% a year during this period. Imports, mainly of intermediate and capital goods, are projected to grow at 12% per year. The above trade projections combined with steadily increasing net factor payments on public and private account would result in a widening of the current account deficit from an average of US$270 million during 1977-78 to an annual average of US$400 million in 1979-83. Private sector borrowing and capital inflow related to construction of the hydroelectric projects, are expected to provide a substantial part of the gross capital requirements and the rest would be borrowed on the public account. Public sector borrowing is projected to rise from an average of US$150 million during 1979-81 to US$280 million in 1982-83 because of the declining Itaipu related capital flows. Bilateral and multilateral agencies are projected to supply a smaller share of external - 5 - capital requirementsthan they had historically. Private financial institutions and supplier'scredits can be expected to provide the rest. Given the projected export performance,Paraguay is expected to maintain its current low debt service ratio.

PART II - BANK GROUP OPERATIONS IN PARAGUAY

14. Paraguay has received US$204.1 million (net of cancellations) of Bank loans and IDA credits. Of this amount, US$154.3 million has been in the form of 15 Bank loans, and US$49.8 million for eight IDA credits. As of February 28, 1979, the Bank and IDA held US$120.1 million, includingUS$94.8 million undlisbursed.The amount held by the Bank and IDA as of March 31, 1979, was Equivalent to about 20% of Paraguay's external debt, with a blend of about 24% IDA and 76% IBRD. The service on this debt amounted to 7% of total debt service in 1977 representingabout 1% of exports of goods and nonfactor services. On a sectoral basis, Bank and IDA assistance to Paraguay has been 46% for agriculture,33% for transportation,11% for education, 5% for industry,3% for water supply, and 2% for preinvestmentstudies in various sectors. Execution of these projects has, on the whole, been satisfactory.

15. IEFChas had one operation in Paraguay. In 1974, it financed a wood processing project. Its participation,a US$5.4 million operation with FINAP, S.A., consisted of a US$4.0 million loan, an equity participation of US$1.0 million, and a contingentloan for the financingof cost overruns of US$0.4 million. Annex II contains a summary of Bank loans, IDA credits and the IFC investment as oi March 31, 1979, and notes on the executionof ongoing projects.

16. Bank Group lending to Paraguay in FY79 consists of the recently approved US$25.0 million loan for a livestockand agriculturaldevelopment project and the proposed project. Work is underway on projects in: pre- investments,ports and inland waterways, rural development,area development (includingwatershed protection and rural development)and industrial and regional development.

17. In lending to Paraguay, the Bank Group tries to assist the Govern- ment in achieving four major objectives,which are interdependentand complementary. One objective is to spread the benefits of growth more widely than before and, more particularly,to attack directly the problem of rural poverty. A second goal is to help Paraguay expand output, including exports, by support:ingprojects that directly or indirectlymake large contributions to producl:ionand employment. A third objective is to support programs that will bring about improvemen,tsin the management of the economy and, particularly, that will help to strengthenpublic institutionsand financial intermediaries. A fourth goal is to transfer sufficientexternal resources to complementParaguay's domestic savings and provide the necessary funds for maintaining an adequate level of economic and social investments in a framework of sound domestic finances. -6-

18. While the last objective primarily influences the magnitude of the Bank Group's program in Paraguay, the other three jointly determine its composition. Naturally, many operations serve more than one of the ends listed and may, moreover, support more specific Government objectives. Thus, Bank Group assistance for education, rural development and rural water supply is designed to help ease the rural poverty problem and to improve the living standards of the lowest 40% of the income distribution scale. Similarly, Bank Group lending for industry, agricultural development and livestock is aimed at increasing the value added of agricultural products destined for export and at expanding marketing outlets, particularly for small farmers. Lastly, loans in the transport sector, such as the proposed highway project, are designed to help improve institutional structures and policies of the sector, which play a vital role in supporting the production activities of the agricultural and industrial sectors. As agriculture constitutes the backbone of the Paraguayan economy, these operations are designed to support either directly or indirectly the development of that sector, by underpinning in particular the Government's efforts aimed at extending social and other backup services, financial support and technical assistance to existing and new agricultural settlements. Furthermore, in view of the increasing development potential of the southeastern region (as a result of the expanding agricultural frontier and the impact of the construction of the large hydroelectric projects -- paragraphs 34 and.35) and the need to assure maximum possible results, the Bank strategy for Paraguay is to place increased emphasis en projects in that region. The proposed project constitutes the centerpiece of the development envisioned for the area in question.

PART III - THE TRANSPORT SECTOR AND PROJECT AREA

Background

19. Landlocked, with its economy based on primary and processed agricultural products, Paraguay depends heavily for its continued economic development on the maintenance and expansion of its transport system. Some 80% of the population, most of the rich agricultural soils, and all of the country's major hydroelectric resources are concentrated southeast of the Paraguay River in what is known as the "Triangle" area of Asuncion-Encarnacion-Ciudad Presidente Stroessner. Historically, economic growth was centered in this area while the main artery for external trade has been the Paraguay River south of Asuncion entering the River Plate Basin and the sea. Since the late 1960's, the Government has made determined efforts to expand outwards from this base with the objective of: (a) improving communications by linking Ciudad Presidente Stroessner and Encarnacion to Asuncion by all-weather roads, with the proposed project completing the "Triangle" by connecting Encarnacion and Ciudad Presidente Stroessner; (b) improving links with the road systems of neighboring Brazil and Argentina, affording alternative routes to the Atlantic Ocean; (c) progressively penetrating the Chaco, the under populated ranchlands northwest of the Paraguay River; and (d) maintaining and improving domestic airport facilities. -7-

The Transport System

(a) River Transport and Ports

20. Over 60% of Paraguay's international traffic is handled by river. The Paraguay and the Parana are the principal navigable rivers of Paraguay and, with the Rio de la PlataLconstitute a 1,600 km system. Bulk exports, such as wood products, cattle and meat, tobacco, cotton and soya are mostly shipped froma the river ports of Asuncion (Paraguay River), and Encarnacion (Parana River) to Buenos Aires for onloading to seagoing vessels. North of Asuncion, the Paraguay River continues to provide the only reliable means of communication to agricultural settlements around Concepcion and the northeast border with Brazil. However, river transport is restricted by the limited depth and width of navigable channels in the Paraguay River and the high speed of current in the Parana River. The Government is in the process of converting its merchant fleet from self-propelled ships to push-tow barges and tugs. The port of Asuncion, improved with Bank financing (Loan 437-PA, US$2.8 millton, December 1965), is by far the largest of the country's ports and has sufficient capacity, but limited investments are needed to renew obsolete equipment and facil:itiesand to provide equipment and storage to handle the small volume of container traffic using the port. Congestion in the port zone in related urban areas is exacerbated by export of bulk goods through Asuncion, and alternatives are being sought; a project to strengthen port facilities in Asuncion and neighboring Villetta is under preparation with financing under IDA Credit 587-PA (Preinvestment Studies Project) and is expected to lead to a Bank-supported project.

(b) Air Transport

21. International passenger traffic is growing rapidly and has more than tripled since 1967. Domestic air traffic, while low in terms of absolute numbers, is important because it often constitutes the only means of transport among various sections of the country, especially during the wet season when many roads are closed. Two Paraguayan airlines provide scheduled air transportation, one domestically and the other internationally. The growth of domestic aviation is hampered by antiquated aircraft, inadequate air fields and poor navigational aids, and there is a need for institutional development. Studies were carried out with financing from IDA Credit 587-PA with a view to developing proposals for improvements in the sector. The Government is at present reviewing its policies with regard to the development of air transportation.

22. The continued operation of the Presidente Carlos Antonio Lopez railway is a permanent tenet of Government policy. It crosses the "Triangle" area from Asuncion to Encarnacion (376 km) and is linked by ferry with the Argentine railway. Railway traffic is small in absolute as well as relative terms when compared to other modes and the railway does not attract sufficient traffic to be financially self-sustaining. In 1971 the Bank obtained a Government undertaking to limit railway subsidies. The deficit of the railway has been maintained at moderate levels increasing from - 8 -

US$680,000 in 1971 to US$1.4 million in 1978. Several studies, includinga recently prepared Transport Plan, have suggested limited track rehabilita- tion, which would maintain the railway in operation at lesser costs and would allow it to increase slightly its freight traffic while continuing to provide an alternativeto river and road transportconnecting with Argentina.

23. However, the Governmenthas recently been consideringproposals to upgrade the railway substantiallyand to electrify its operations. Concern with the financial viability of the railway led to inclusionunder the Loan Agreement 1529-PA (Fifth Highway Project) of a Governmentundertaking not to make investmentsin the railways permanent way and rolling stock without prior review by the Government'stransport planning agency (OCIPT,paragraph 32); and to transmit the findings of the above review to the Bank in case of investmentsof more than US$5 million in any given year. Such a review would include an assessment of the impact of the proposed investmentson the public finances. Assurances similar to those included under Loan 1529-PAhave been obtained for the period 1980-1984 (Section 4.03 of the Agreement).

(d) Highways

24. Road developmentin Paraguay really commenced in 1950 when the total road network was only 850 km; ten years later, the network had reached 2,165 km (9% was paved). Today the network under maintenance totals 8,500 km, of which 6,700 km (15% is paved) are the responsibilityof the Ministry of Public Works and Communications,and the remainder 1,800 km (Chaco Region) are the responsibilityof the Army. Past efforts were concentratedon economic and population centers and paving the most heavily travelled roads. However, because of rain, some of the roads are closed up to 100 days per year affecting adversely the economic development of vast areas of the country. A study of the local constructionindustry and relatedMinistry practices and regulations was completed in 1978 under the Fourth Highway Project. The study recommended measures to improve the industry, such as credit facilities;an improved register of contractors,including equipmentinventories, working capital etc.; and revision of the existing legislationto facilitate the relationship between the Ministry and contractors. The proposed operationprovides a framework for the implementationof the study recommendations(Section 4.07 of the Loan Agreement).

25. In addition to the network under maintenance,there is an extensive network of feeder roads of about 6,000 km. These roads were constructedby various Governmentagencies and by farmers, but are only sporadicallymain- tained and are impassableduring the rainy season. The feeder road network has never been inventoried;the Fifth Highway Project includes an inventory of the entire network, including feeder roads. This inventory is scheduled to be carried out over the period 1979-1981.

26. The area best served by roads is the southeasternpart of Paraguay (the "Triangulo"area). The two principal inter-urbanroutes, Asuncion- Cuidad Presidente Stroessner (376 km), Route 7, and Asuncion-Encarnacion(370 km), Route 1, are paved all-weatherroads. Historical traffic survey data are not reliable, but current estimates are that the system's average daily traffic is about 200 vehicles,with paved roads carrying an average of 1,200 vehicles per day. - 9 -

27. Road transport regulation is the responsibility of the General Transport Directorate, a department of the Ministry, but in practice domestic truck transport is practically unregulated. However, competition among domestic truckers and with international operators competitors is keen, and service levels are good; freight rates compare favorably with those of neighboring countries. The Paraguayan trucking fleet, while still small, has recently been growing rapidly. Vehicle overloading remains a serious problem. The Fifth Highway Project (Loan 1529-PA) provided for the installa- tion of automatic weighing stations and adoption of an enforcement program including operating procedures. In line with requirements under Loan 1529-PA, the Government has undertaken to implement an axle weight control program satisfactory to the Bank; a study to design the enforcement program is to be completed by May 31, 1980 and its recommendations should be implemented by December 31, 1980 (Section 4.04 of the Loan Agreement).

28. IHighwayexpenditures are financed through the Government's general budget. Over the period 1970-77, about 45% of total highway construction (US$5.8 mil:Lion equivalent p.a. average) was financed by external borrowing. Maintenance outlays are funded by taxes on fuels and a surcharge on vehicle imports. The proceeds of road user charges have substantially exceeded highway expendilures since 1970 aLnd in the future are expected to continue providing sufficient resources to support the development of the road network, including increased maintenance outlays. Under the proposed operation, the Government has undertaken that it will continue to ensure proper maintenance of the national highway network on the basis of agreed budgetary allocations. In particular, the Ministry's Directorate General of Highways (DGV), is to prepare by December 31, 1981 an assessment of periodic maintenance requirements (Section 4.05(a)-(c) of the Loan Agreement).

29. DGV is responsible for planning, constructing and maintaining all national and departmental roads, except in the Chaco area where the Army has responsibility for roads (with the exception of the Transchaco road). The strong demand for qualified technical personnel for the Itaipu and the Yacyreta hydroelectric projects has reduced the Ministry's ability to retain experienced staff, especially at DGV's headquarters. The proposed project would provide technical assistance to strengthen the capacity of DGV as necessary to implement the main road construction component. In addition, the Government has agreed to address the problem of permanent staffing of DGV (paragraph 43).

30. Nominally, feeder roads are administered by a road committee system. The only resource of this road committee system is "conscripted labor" (i.e., legally compulsory labor) or, alternatively, annual conscription fees and fines. Due to its complex organization, weak administration and inadequate funding, the road committee system is almost completely ineffective. The uncoordinated action of different independent institutions on feeder road development and management has produced widely diverse results, particularly in small farmer settlement areas. The proposed project provides for the establishment of a Feeder Roads Unit under DGV to ensure that major upcoming feeder road construction works are carried out satisfactorily and to initiate work on improvement of planning, construction and maintenance of feeder roads on a nationwide basis. - 10 -

31. Highway maintenance is performed through four district offices. The Government,with assistancefrom the Bank, has achieved substantialpro- gress in highway maintenanceover the last 15 years. The Government's awareness of the situation is reflected in the yearly maintenanceallocations, which increased from US$1.5 million in 1970 to over US$4.5 million in 1979.

TransportPlanning and Coordination

32. One of the major problems in the transport sector has been the lack of overall sector policies and coordinationof investmentdecisions. Pursuant to the recommendationsof the 1973 UNDP Transport Survey (for which the Bank was the executingagency), the Governmentcreated within the Ministry the Office of Coordinationand Integral Planning of Transport (OCIPT),as a first step toward establishmentof a planning mechanism, to advise the Governmenton transport planning and coordination. The Fourth and Fifth Highway Projects (Loans 1059-PAand 1529-PA) enabled OCIPT over its first three years of operation to begin a systematiccollection of data relevant to planning and to prepare a transportplan, including a ten-year transport investmentprogram. OCIPT also completeda series of feasibility studies for a total of about 600 km of roads, including feasibilitystudies on which the proposed project is based. However, the task of developing OCIPT is not yet completed;its continued strengtheningwould be one of the goals of the proposed project.

Past Bank Assistance for Highways

33. Over the past 16 years, the Bank Group has been assisting the development of road transport in Paraguay. Five highway projects (total lending US$64 million) were made since 1964, which resulted in (a) upgrading of more than 600 km of primary roads, that is, more than 65% of the network presently paved; and (b) bulding up the maintenancecapacity. In addition, four agricultural projects (AgriculturalDevelopment of 1951, Small Farmer Credit and Rural Developmentof 1974; Second Rural Development of 1977; and Livestock and AgriculturalDevelopment of 1979) have provided about US$16.0 million for improvementand maintenance of about 1,500 km of feeder roads. The Project PerformanceAudit Reports No. 558 of October 30, 1974 and No. 2023 of April 14, 1978 for the Second Road Project (Loan 443-PA of 1966) and for the Second Road MaintenanceProject (Loan 652-PA of 1970), respectively, concluded that the projects were well justifiedand that they had met their objectives. In particular,the report for the Second Road Maintenance Project stressed the importanceof pursuing the strengtheningof the maintenance organizationfor which three importantactions were required: (i) adequate supply of spare parts; (ii) systematicreplacement of equipment; and (iii) strengtheningof DGV's staff. Action on these three points was taken in the Fourth and Fifth Highway Projects; the proposed project continues to address the staffing issue.

Regional Developmentin Eastern Paraguay

34. The area of the eastern-mostParaguay is experiencinga process of rapid developmentresulting from the expansion of the agriculturalfrontier and from stimulus and expectationsthat constructionof the two huge hydroelectric projects of Itaipu and Yacyreta have fostered. Soybean productionpredominates - 11 - in the area's two Departments (Alto Parana and Itapua) and accounts for about 70% cf national production. Rice, wheat, corn, manioc, cotton, tobacco and beans are the other main crops grown in the area; livestock is an additional important activity. The emergenceof substantial economic opportunitiesin this area has intensifiedpreviously existing currents of internal and external migration,broadened the regional economy'sresource base, and brought about a closer integrationof the area with t:herest of Paraguay, as well as with neighboringBrazil. A major obstacle in the colonizationof these fertile lands in the past was the lack oE transport infrastructure,which together with a dense forest covering,made it relatively inaccessible. Routes 1 (Asuncion-Encarnacion) and 7 (Asuncion-CiudadPresLdente Stroessner),the country'smain transport arteries,have reinforced the function of Encarnacionand Ciudad Presidente Stroessner as regional agriculturalservice centers. The lack of a direct land route between t'hesetwo urban settlementsis still limiting the rate cf expansion of the agriculturalfrontier along the Parana River. The constructionin the mid-1960s of a bridge over the Parana between Ciudad Presidente Stroessner and Foz do Iguazu resulted in a significantboom in Ciudad PresidenteStroessner, and at the same time provided E'araguaywith a direct link with the Atlantic Ocean.

35. In Eastern Paraguay, in line with its overall Rural Development strategy, the Government is devoting increased attention to the strengthening of existing settlementsand to executing rural developmentprojects in new settlement areas through the provision of agriculturalcredit, extension and settlement infrastructure,such as feeder roads. The aim is to ensure that through these programs small farmers have the opportunityto participateas full partners in the developmentof the area. The ongoing Second Rural Devel- opment Project (Loan 1418-PA) in the Itapua Department and an area development project in the neighboringCaazapa Departmient(involving watershed protection, rural development-typeactivities and roads linking the project area to Route 6), currently under preparation,and expected to lead to an appraisal by the Bank in early 1980, constituteGovernment efforts to provide an institutionalframework to the colonization--whichso far has been largely spotaneous--of this part cf the country. The Bank report on "Regional Development in Eastern Paraguay" (1978) made an assessment of the issues related to the development of the region. The Government concurs with the report's analysis and recommendations, in particular that the region be granted lpriority attention from the public sector. In line with the report's recommendations,the emerging strategy for the area calls for an attempt to foster investments that are complementary in nature so as to capture the full impact of each iadividual effort. The proposed project fits this strategy, since Route 6 and its complementary feeder roads would provide an essential transport network to this agricultural area. In this context, the Bank is considering proposals for investment in rural developument in the southern part of the Alto Parana Department (South of Route 7), as well as in industrial development centered in Ciudad Presi- dente Stroessner and Encarnacion,as part of the next IndustrialCredit Project, now under preparation. To establish the type of land use pattern that has emerged thus far in the zone and to assess the latitude remaining for influencing further development, the IDB is providing - 12 -

assistance to the Government in regional planning. In addition, a cadastral survey of the zone is expected to be completed by December 31, 1980 (Section 4.06 of the Loan Agreement).

PART IV - THE PROJECT

36. A report entitled "Staff Appraisal Report-Sixth Highway Project" (No. 2455b-PA dated June 4,1979) is being distributed separately. A Loan and Project Summary is being placed at the front of this report. A Supplementary Project Data Sheet is appended as Annex III. The project was identified by the Ministry of Public Works and Communications in January 1978, following a review of the UNDP-financed Transport Survey (1973) and the findings of the Bank Report on "Regional Development in Eastern Paraguay" (1978). The project was subsequently prepared by consultants during 1978-79 and was appraised in February 1979. Negotiations were held in Washington in May 1979; the Paraguayan Delegation was led by Dr. Cesar Romeo Acosta, President of the Central Bank of Paraguay.

Project Objectives and General Description

37. The objectives of the proposed project are to: (a) provide road infrastructure to support the rapid agricultural development of the southern Alto Parana and Itapua regions; (b) improve the Government's capacity to meet increasing requirements for feeder and rural roads and develop better methods for the design, construction and maintenance of such roads; and (c) pursue the objectives of the Fifth Highway Project for improving transport sector management. The feeder roads component largely reflects needs identified in previous agricultural projects, while the investments in road construction support overall Government development programs for the region.

38. Specifically, the project would consist of the following:

(a) construction, including paving of Route 6 from Pirapo to Route 7, near Ciudad Presidente Stroessner (about 180 km), supplementary design of a bridge, and supervision of construction;

(b) construction of about 500 km of feeder roads, including simplified detailed engineering, civil works and supervision of construction;

(c) technical assistance for the following: (i) establishment of a Feeder Roads Unit under the Ministry's Directorate General of Highways (DGV) and related equipment, vehicles and technical assistance services; (ii) strengthening DGV through technical assistance to meet the extra demands which will be placed on the Ministry for the construction of Route 6; (iii) continuation of technical assistance to strengthen OCIPT, the Government's transport planning agency; and (iv) survey of availability of local road construction materials, including study of appropriate technology for utilizing such materials in road construction and maintenance.

Implementation of the project is expected to take five years (1980-1984). - 13 -

(a) Constructionof the Pirapo-CiudadPresidente Stroessner Road (Route 6), about 180 km

39. RLoute6, when completed,would constitute the third side of the "Triangle" formed by the cities of Asuncion, Encarnacionand Ciudad Presi- dente Stroessner within which lies the area where the bulk of the population and economiLc activity of the country is concentrated. Route 6 would link Pirapo (the terminal point of the Encarnacion-Piraporoad being built under Loan 1059-]?A;completion is scheduledfor early 1980) with a point on Route 7 located about 30 km west of Ciudad PresidenteStroessner, crossing an area of very rapid agriculturaldevelopment. At present, Pirapo and Ciudad Presidente Stroessner are connectedby surface through tracks or feeder roads built mainly by farmers. Final engineeringfor the road, except for supplementary engineeringfor a major bridge (expectedto be completedby late 1979), has now been completedby consultantsETEL-ASTEP (Brazil),financed through an inter-governmentalarrangement between Brazil and Paraguay; costs have been kept to minimum levels without affectingthe basic characteristicsand safety of the road. The design standards for the project roads (includingthe feeder roads) have been confirmedat negotiations (AnnexA to Schedule 2 of the Loan Agreement).

(b) Constructionof about 500 km of Feeder Roads

40. The project would include the constructionof a series of collector roads (about 500 km) more or less transversalto Route 6; about 165 km of these roa,iswould follow, as far as practicable,the alignment of the present tracks while about 335 km of new collectorswould be constructed.

41. The preliminarylocation, length, design standardsand cost estimates of the proposed Eeederroads required to serve the project area were prepared by consultantsSAE-EIT-CONTEC (Argentina/Paraguay), with financingunder Loan 1529-PA, on the basis of field surveys. The present project provides for the financingof simplified detailed engineeringto define alignmentsand prepare final cost estimatesand bidding documents. This engineeringwould be carried out in close coordinationwith the constructionon various tranches. The feeder roads would be earth- surfaced and would be providedwith culverts. The programwould be carried out by tranches,grouping road sections by geographic areas. The tentative location and length of the roads to be built or improved under the project, and the overall schedule for the engineeringand construction have been reviewed and agreed during negotiations.

42. To date, DGV has been constructingfeeder roads by force account. However, recognizingthe diminishedcapacity of the lAinistryin relation to its expandingworkload, DGV has agreed that the feeder roads under the proposed project should be constructedthrough contract. The problem of the maintenanceof the project feeder roads will be addressedin connec- tion with the proposed creation of a Feeder Roads Unit within DGV. The Government has undertaken to prepare and adopt, no later than June 30, 1982, a program acceptable to the Bank to ensure, on a continuingbasis, the satisfactorymaintenance of the feeder roads in the zone of influence of Route 6 (Section 4.05(d) of the Loan Agreement). - 14 -

43. The project would provide consulting services (about 620 man-months) to assist the Ministry in the following areas:

(i) Creation of a Feeder Roads Unit. The Unit's initial task would be to take responsibility for coordinating the preparation and execution of the feeder roads components of all major agricultural development projects. This would be an institutional improvement of major importance that would directly facilitate a number of ongoing and planned agricultural development projects. At a later stage, the unit is expected to assume responsibility for administer- ing the construction and maintenance of all feeder roads in Paraguay in coordination with local authorities. The functions, lines of authority, staffing and financial needs of the Unit have been reviewed and found satisfactory (Section 3.03(a) and Schedule 5 of the Loan Agreement). It has also been agreed that by December 31, 1980, the Government would submit a plan of action satisfactory to the Bank for the permanent staffing of the Unit which would be implemented by June 30, 1982 (Section 3.03(d) of the Loan Agreement).

(ii) Strengthening of DGV Staff. The project would provide an opportunity to address the issue of permanent staffing of DGV (paragraph 29). A commitment has been obtained that the Government would adopt, by December 31, 1980, a plan of action satisfactory to the Bank for achieving adequate permanent staffing of DGV by June 30, 1982 (Section 3.05 of the Loan Agreement). This plan would detail the salary and benefit packages necessary to attract suitable engineers, taking into account the demand for such professionals by major development projects and in particular from consulting firms active in Paraguay. Compliance with this covenant, particularly the preparation and subsequent implementation of the proposed plan of action, would be monitored closely by way of periodic consultations with the Bank.

(iii) Further Assistance to OCIPT for Transport Planning. OCIPT is facing an expanded work program without adequate staff. The Government has undertaken to review and adjust the level of salary authorized for OCIPT as necessary to enable it to attract suitably qualified staff; such adjustment would be adopted no later than January 31, 1980 after consultation with the Bank (Section 3.06(b) of the Loan Agreement). The Government has undertaken to execute OCIPT's work program for 1980-1981, which is satisfactory to the Bank (Section 3.06(a) and Annex B to Schedule 2 of the Loan Agreement).

(iv) Survey of Locally Available Road Construction and Maintenance Materials. The need to prepare an inventory of road construction and maintenance materials along the main existing and future routes has been felt for a long time. The principal objective of - 15 -

this component is to identify sources of constructionand maintenance materials and develop technologiesto use these materials to improve rural roads, thus making them less susceptibleto closure during the wet season. This study is to commence by June 30, 1980 and to be completedby June 30, 1982 (Section 3.07 of the Loan Agreement).

Cost Estimates and Financing

44. The total cost of the project, net of taxes and duties (in line with Government regulations,the bulk of project expenditureswould be exempt from taxes and duties), is estimated at about US$65.5 million, with a foreign exchange comaponentof US$42.5 million; of this, US$39.0 million would be financed by the proposed loan. The Government intends to finance the remainder of the fore:Lgnexchange costs, plus US$3.5 million equivalent of local costs, through a loan of US$7.0 million, from a private bank, Lloyds Bank International Limited. This loan (which is expected to be signed concurrentlywith the proposed loan agreement) is at 12 years, includingsix years of grace, and 7/8% above (six months) LIBORtduring the first six years and 1% above LIBOR thereafter. Since the additional loan from Lloyds has been obtained on better terms than are otherwise avaLlable to Paraguay, the Loan Agreement includes (i) a "cross default" clause; (ii) a skewed amortizationschedule so that uniform, semi-annualamortization payments would amortize the foreignexchange cost financing of both loans; and (iii) a provision that disbursementsfor civil works be conditionedon US$3.5 million of the co-lender'sloan (i.e., the co-financingcorresponding to the foreign exchange component)having been fully utilized for the same purposes as the Bank funds (paragraph4(b) of Schedule I of the Loan Agreement); this is expected to occur within the first year and a half of the project period. A memorandum of agreementwould also be entered into between the World Bank and the private bank substantiallyin the form the earlier Bank agreementswith commercial banks, governingthe relationshiLpbetween the two banks in the implementationof this project.

45. A contingencyallowance of 10% has been included to cover increases in constructionquantities. About 15% of the project base cost plus physical contingencLeshas been allowed for foreign price variations and 48% for local prices over the implementationperiod. For consultingservices, the cost per man-month is estimated to average about US$4,000 per man-month (rangingfrom US$2,000 to US$7,000). The various consultingservices would requirea total of about 1,400 man-months,:Lncluding 780 man-months for detailed engineering for a bridge and feeder roads and supervisionof civil works, and 620 man-months for technicalassistance.

Execution.Procurement and Disbursemenits

46. Execution. Execution of the project would be the responsibilityof the Ministry through two of its Directorates: (a) DGV for (i) civil works; (ii) detailed engineeringfor feeder roads; (iii) related equipment,vehicles and technicalassistance; and (iv) the study of road materials;and (b) OCIPT for the transportplanning component.

(a) DGV

47. Two qualified highway engineers of internationalstanding would be provided to DGV through a consultingfirm for a period of about four years each to nmet the Ministry's obligationsas executingagent for the construction of Route 6. They would assist DGV in the preparationof the invitations - 16 - to bid, analysis of bids and recommendations for contract awards, selection of consultants and in the supervision of construction among other tasks. The establishment of the Feeder Roads Unit, along with the appointment of its manager and deputy manager, an agricultural economist, a road construction and maintenance expert, a highway engineer, an agricultural economist and an accountant/administrator, would be a condition of disbursement for the feeder roads component (paragraph 4(c) of Schedule 1 of the Loan Agreement). These staff, who would be hired not later than March 31, 1980, would initiate the organization of the Unit and its coordination with related agencies; the remaining staff would be hired not later than September 30, 1980 (Section 3.03(b) and (c) of the Loan Agreement). In view of the current difficulties to attract suitable staffing to DGV, the Unit's staff would initially be hired through a contract with a consulting firm and would include both Paraguayan nationals and expatriates. Proper coordination between the Unit and other agencies involved with the construction of agricultural feeder roads would be carried out through a Coordinating Committee headed by a representative of the Ministry and comprising representatives of the Ministry of Agriculture and the Rural Welfare Institute (the Government settlement agency). The composition and functions of the Coordinating Committee, which would be established by December 31, 1979, have been confirmed during negotiations (Section 3.04 of the Loan Agreement).

(b) OCIPT

48. The present staffing situation of OCIPT is three professional staff in place and three vacancies. OCIPT would be strengthened under the project by one engineer and one economist who would provide experience and training to support OCIPT's program for 1980/81 (Section 3 .06(c) of the Loan Agreement). The Government has confirmed that OCIPT would continue to be provided with sufficient resources to carry out its agreed work program; specific estimates of related requirements for the period 1980/81 were reviewed and agreed at the time of negotiations (paragraph 43). The filling of the three vacant positions at OCIPT with personnel hired on the basis of criteria acceptable to the Bank, would be a condition of disbursement for the OCIPT component (paragraph 4(d) of Schedule 1 of the Loan Agreement).

49. Procurement. Civil works would be carried out on the basis of unit price contracts awarded through international competitive bidding in accordance with the Bank's Procurement Guidelines. The construction of Route 6 would be subdivided into two lots, the northern section (about 100 km) and the southern section (about 80 km) and would follow the following implementation schedule: bidding for the southern section is expected to start around November 1979 following prequalification, which is to commence shortly. Bidding on the northern section is expected to occur around March/April 1980, after completion of supplementary bridge engineering and after award of contract of the southern section. In view of the relatively large size of the lots (between US$10.0 million and US$25.0 million) it is likely that contracts would be awarded to foreign firms, with local firms participating in joint ventures or as sub-contractors. Subdivision into smaller lots proved impractical because of the need for the contractor to ensure access to the proposed new alignment through tracts. To attract contractors, in the case of the feeder roads, the size of bidding lots would be of at least US$0.3 million. - 17 -

Availabilityof simplifiedengineering would be a preconditionfor tendering for the cortespondingfeeder roads works (Part A, paragraph4 of Schedule 4 of the Loan Agreement). Vehicles and office equipmentrelated to the Feeder Roads Unit (for a total cost of about US$0.1 million) would be procured through internationalcompetitive bidding, in accordancewith the Bank's ProcurementGuidelines; however, contracts up to an aggregateof US$20,000 equivalent for office equipmentwould be advertised locally in accordancewith the Ministry's regulationswhich are acceptable to the Bank. Consultants retained for the project would be engaged on the basis of qualifications,and terms and conditions of employmentsatisfactory to the Bank (Section3.02 of the Loan Agreement). The project implementationschedule has been agreed during negotiations(Schedule 3.01 of the Loan Agreement).

50. Disbursements. Project expenditureseligible for disbursementof the Bank Loan are defined as follows: (a) 72% of expendituresfor works oa Route 6; (b) 62% of expendituresfor works on feeder roads; (c) 100% of foreign expendituresor 90% of local expendituresfor equipment and vehicles for the Unit; and (d) 80% of expendituresfor (i) supervisionof construction, (ii) detailed engineeringof a bridge and feeder roads, (iii) technical assistance to the Unit, DGV and OCIPT, and (iv) the study of road materials. The amount disbursed against local costs involved in consultingservices would be compensatedby the fact that the proposed Bank participationin financing of civil works is less than the estimated foreign exchange component. Disburse- ments of the Bank loan would be made against normal documentattoa.

E.conomic Evaluation

51. 'Cheprincipal quantifiable benefits from the proposed project would be (a) agricultural value-added due to the proposed main and feeder road componentsand complementaryagricultural investment (representing70%. of total benefits), and (b) reduced vehicle operating costs and time savings for traffic not directly related to agriculturalactivity in the zone of influence of the project roads (representing30% of total benefits). Benefits quantified under (a) were estimated on the basis oE agriculturalvalue-added resulting from the project roads and complementaryinvestments (i.e., (i) value added to existing production due to reduced transport costs and (ii) additionalproduc- tion that would occur due to the investmentsfacilitated by the project roads), thus inducing a more intensiveuse of already cultivated land and the opening up of additionalpotentially productive land. The road design standardsare the lowest on the basis of trafficprojections and the Ministry's maintenance capabilit:ies.The project is well justifiedwith an economic rate of return, based on conservativeestimlates of agriculturalvalue-added andt ceduced transport cost for non-agriculturaltraffic, of about 18%. Sensitivity analysis demonstratesthat even under the pessimisticassumption that overall constructioncost would be 15% higher and that, simultaneously,construction of feeder roads would be delayed on average by two years, the economic rate of return would still be about 13.5%, which is above the estimated opportunity cost of capital in Paraguay.

52. Competitionin the trucking industry is intense and freight rates are very compietitive.In the zone of influenceof the project, most produce-carrying trucks are owned by farmers or their cooperatives. Therefore, it is reasonable - 18 - to assume that the majority of the benefits from transport cost savings will be passed on to, or accrue to, the farmers of the zone. M4any of these farmers are Brazilians or Japanese-origin settlers who have permanently immigrated to Paraguay bringing along with them advanced agricultural practices and credit; however, the construction of Route 6 and its feeder road network is expected to result in an inflow of larger numbers of settlers coming from the minifundia areas surrounding Asuncion. The Government and the Bank, through on-going and prospective agricultural projects are addressing the problems of the small- scale farmers in the area, to ensure that they participate fully in the exploitation of the agricultural resources which are being enhanced by the construction of the project roads (paragraph 35).

Risks

53. Neither the construction works on Route 6 nor the construction of 500 km of feeder roads presents special risks. The assumptions underlying the economic analysis are sufficiently conservative that the future traffic estimates are not in question. In particular, private investment required for the economic benefits can be expected with a high level of probability since financial returns to farmers are estimated to exceed 20Z. Appropriate funding of local costs has been reviewed and found within the financial capacity of the Government. In view of the relatively good perfornariceof Paraguay under similar projects, the risks have been reduced sufficiently to allow a reasonable expectation of success concerning the physical objectives of the project. A higher element of risk is attached to the institution-building objectives. Although specific covenants would ensure continuing Government support for DGV and OCIPT through the project period, it should be recognized that the building up of DGV's management capabilities and the strengthening of OCIPT's transport planning functions are long term processes depending largely upon the availability of qualified professional staff. Special attention would be attached to the measures undertaken to bring a permanent solution to the problem of staffing of DGV during project implementation.

PART V - LEGAL INSTRUMENTS AND AUTHORITY

54. The draft Loan Agreement between the Republic of Paraguay and the Bank, and the Report and Recommendations of the Committee provided for in Article III, Section IV (iii) of the Bank's Articles of Agreement are being distributed to the Executive Directors separately.

55. Special conditions of the Loan are listed in Section III of Annex III. Loan disbursements for civil works would be conditioned on US$3.5 million of the co-lender's loan having been utilized for the project. The establishment and initial staffing of the Feeder Roads Unit and the filling of the three OCIPT vacant posts with personnel hired on the basis of criteria acceptable to the Bank would be conditions of disbursement for the feeder roads and OCIPT components, respectively (paragraphs 47 and 48).

56. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. - 19 -

PART VI - RECOMMENDATION

57. I recommend that the Executive Directors approve the proposed loan.

Robert S. McNamara President

Attachments June 4, 1979, - 20- ANNEX I TAXL 3A Pace 1 nf -N PARAGUAT- SOCIAL INDICATORS DATA SHEET

EPEOM!CEGROUPS (ADJUSTED AVEAGES PARArUAY / LAND AREA (THOUSANDSQ. KM.) - MOST RECENT ESTIMATE) TOTAL 406.8 SAME SAME NEXT HIGHER AGRICULTURAL 159.7 MDST RECENT GEOGRAPHIC INCOME INCOME 1960 Lb 1970 Lb ESTIMATE lb REGION /c GROUP /d GROUP /e

GNP PER CAPITA (USS) 230.0 360.0 760.0 1066.7 867.2 1796.4

ENERGY CONSUMPTIONPER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 87.0 140.0 153.0 911.1 578.3 1525.0

POPULATION AND VITAL STATISTICS TOTAL POPULATION, MID-YEAR (MILLIONS) 1.7 2.2 2.7 URBANPOPULATION (PERCENT OF TOTAL) 34.8 35.7 37.4 57.9 46.2 52.2

POPULATION DENSITY PER SQ. KM. 4.0 6.0 6.6 25.6 50.8 27.6 PER SQ. KM. AGRICULTURALLAND 12.0 14.0 16.9 77.6 93.3 116.4

POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 45.9 /f 46.4 44.7 j 42.0 42.9 34.8 15-64 YRS. 50.2 /f 50.4 51.3 /g 52.2 53.5 56.0 65 YRS. AND ABOVE 3.9 /f 3.2 4.0 La 3.7 3.5 5.7

POPULATION GROWTH RATE (PERCENT) TOTAL 2.2 /h 2.6 /h 2.7 /h 2.7 2.5 1.6 URBAN 2.7 2.8 3.7 4.3 4.7 3.4

CRUDE BIRTH RATE (PER THOUSAND) 44.7 41.8 39.8 35.8 37.8 27.0 CRUDE DEATH RATE (PER THOUSAND) 14.7 10.8 8.9 9.1 10.8 9.9 GROSS REPRODUCTIONRATE .. 3.2 3.0 2.6 2.5 1.9 FAMILY PLANNING ACCEPTORS, ANNUAL(THOUSANDS) .. .. 20.3 USERS (PERCENT OF MARRIED WOMEN) .. .. 10.0 15.1 20.0 19.3

FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1970-100) 94.3 100.0 94.3 102.1 107.3 103.8

PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 112.0 121.0 118.0 103.9 105.3 110.4 PROTEINS (GRAMS PER DAY) 76.0 74.0 74.5 60.3 63.0 77.7 OF MaICH ANIMAL AND PULSE 40.0 /i 41.0 38.9 26.7 21.7 22.2

CHILD (AGES 1-4) MORTALITY RATE 5.6 6.9 3.2 /i 8.7 8.0 1.9

HEALTH LIFE EXPECTANCYAT BIRTH (YEARS) 54.4 59.0 61.9 62.6 57.2 63.0 INFANT MORTALITY RATE (PER THOUSAND) 90.7 93.8 84.0 56.9 53.9 38.2

ACCESS TO SAVE WATER (PIRCENT OF POPULATION) TOTAL 6.0 11.0 13.0 60.7 56.8 67.7 URBAN .. 22.0 25.0 78.0 79.0 83.5 RURAL .. 5.0 5.0 34.9 31.8 41.5

ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. 6.0 10.0 61.1 30.9 70.3 URBAN .. 16.0 28.0 80.3 45.4 90.7 RURAL ...... 25.4 16.1 38.3

POPULATION PER PHYSICIAN .. 2340.0 L 2120.0 1899.3 2706.8 1310.8 POPULATION PER NURSING PERSON .. 2310.0 2090.0 1220.1 1462.0 849.2 POPULATION PER HOSPITAL BED TOTAL 430.0 620.0 610.0 / 422.3 493.9 275.4 UkA .. 240.0 .. 254.2 229.6 129.9 RURAL .. 5830.0 .. 2281.6 2947.9 965.9

ADMISSIONS PER HOSPITAL BED ...... 25.6 22.1 18.9

HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL 5.5 /f .. 5.5 LK 5.2 5.2 3.9 UR8AN 5.3I/ .. 5.1 .. 5.0 RURAL 5.7 /f .. 5.8 L .. 5.4

AVERAGE KIBER OF PERSONS PER ROOK TOTAL 2.6 /f .. 2.4 2.0 2.0 0.9 URBAN 2.6 /f .. 1.7 2.1 1.5 0.8 RURAL .. .. 3.1 2.7 2.7 1.0

ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL 13.01/ .. 17.5 L 51.2 64.1 59.2 URBAN 33.2 1 £ 41.5 /R 77.3 67.8 78.0 RURAL 1.214 .. 1.2 L 12.8 34.1 12.5 ANNEX I - 21 - Page 2 of 5

TABLS 3A -PARAUAT- SOCIALINDICATORS DATA SHEET

REYERENCEGROUPS (ADJUSTED AVERAGES PARAGUAY - MOSTRECENT ESTIMATE) Aa SAME SAME NEXT HIGHER MOSTRECENT GEOGRAPHIC INCOME INCOME 1960 L 1970 Lb ESTIMATE/b REGIONLe GROUP/d GROUP/e EDUCATION ADJUSTEDENROLLMENT RATIOS PRIMARY: TOTAL 98.0 109.0 106.0 103.5 99.8 97.6 FEMALE 90.0 104.0 102.0 102.9 93.3 87.4

SECONDARY: TOTAL 11.0 17.0 20.0 37.2 33.8 47.8 FEMALE 11.0 17.0 20.0 37.9 29.8 42.6

VOCATIONAL (PERCENT OF SECONDARY) 7.0 6.0 5.0 L1 14.7 12.8 22.7

PUPIL-TEACHER RATIO PRIMARY 28.0 32.0 28.0 32.8 34.9 25.4 SECONDARY 8.0 9.0 10.0 17.8 22.2 24.9

ADULT LITERACY RATE (PERCENT) 74.0 If 79.0 81.0 14 74.9 71.8 96.3

CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION 2.0 7.0 7.0 26.9 12.4 32.3 RADIORECEIVERS PER THOUSAND POPULATION 83.0 71.0 68.0 173.5 104.5 201.9 TV RECEIVERS PER THOUSAND POPULATION .. 20.0 21.0 69.4 28.1 97.7 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPIJLATION .. 44.0 37.0 72.8 45.2 70.9 CINEMA ANNUAL ATTENDANCE PER CAPITA ...... 4.3 4.6 4.4 EMPLOYMENT TOTAL LABOR FORCE (THOUSANDS) 590.0 700.0 810.0 FEMALE (PERCENT) 21.7 21.4 22.5 21.4 25.7 17.4 AGRICULTURE (PERCENT) 55.0 53.0 49.0 37.8 46.2 38.4 INDUSTRY (PERCENT) 19.0 19.2 ..

PARTICIPATION RATE (PERCENT) TOTAL 32.5 31.7 31.9 30.8 33.8 33.7 MALE 51.7 50.0 49.6 47.2 48.1 50.8 FEMALE 13.9 13.5 14.3 13.2 17.3 12.6

ECONOMIC DEPENDENCY RATIO 1.7 1.6 1.5 1.7 1.4 1.4

INCOME DISTRIBUTION PERCENTOF E'RIVATEINCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS .. 30.0 .. 28.9 23.6 20.2 HIGHEST 21) PERCENT OF HOUSEHOLDS .. 62.0 .. 57.7 52.3 47.9 LOWEST 20 PERCENT OF HOUSEHOLDS .. 4.0 .. 3.2 4.3 3.2 LOWEST 40 PERCENT OF HOUSEHOLDS ...... 10.7 13.1 13.7

POVERTY TARGEr GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN . .. .. 251.9 191.9 RURAL . .. .. 200.6 193.1 157.9

ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 239.0 403.1 319.8 448.8 RURAL .. *. 171.0 258.0 197.7 313.1

ESTIMATED P'OPULATION BELOW POVERTY INCOME LEVEL (PERCENT) URBAN .. .. 21.0 24.8 19.8 23.2 RURAL .. .. 68.0 65.2 35.1 54.5

Not avaiLable Not applIcable. NOTES

/a The adjusted group averages for each indicator are population-weighted geometric means, excluding the extreme values of the indicator and the mclst populated country in each group. Coverage of countries among the indicators depends on availabilityr of data and is not uniform.

/b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1973 and 1977.

/c Latin America & Caribbean; /d Intermediate Middle Income ($551-1135 per capita, 1976); /e Upper Middle Income ($1136-2500 per capita, 1976); /f 1962; /R 1972; /h Due to emigration of Paraguayans to neighboring countries (Argentina and Brazil), population growth rate is lower than rate of natural increase; Li 1561-63; /i 1971; /k Coverage of data unknown; L4 Provisional or estimated.

September, 1978 - 22 - AMNEXI Page 3 of 5 DEFINITIONS OF SOCIAL INDICATORS

&ixe: The adjusted group averages for each indicator are population-weighted geometric means, excluding the extreme values of the indicator and the most populated country in each group. Coverage of countries among the indicators depends on availability of data and is not uniform. Due to lack of data., group averages for Capital Surplus Oil Exporters and indicators of access to water and excreta disposal. housing, income distribution and poverty are simple population-weighted geometric neans without the exclusion of extreme values.

LANDAREA (thousand sq. km) Population per hospital bed - total, urban, and rural - Population (total. Total - Totol ourface area comprising land area and inland waters. urban, and rural) divided by their respective number of hospital beds Agricciturul - m.ut recent estimate of agricultural area used temporarily available in public and private general and specialized hospital and re- or perroanertly for crops, pastures, market and kitchen gardens or to habilitation centers. Hospitals are establishments permanently staffed by lie fallow. at least one physician. Establishments providing principally custodial care are not included. Rural hospitals, however, include health and medi- GNP PER CAPITA (tS$) - GNP per capita estimates at current market prices, cal centers not permanently staffed by a physician (but by a nedical as- calculated by sane conversion method as World Bank Atlas (1975-77 bhsis); sistant, eurse, midwife, etc.) which offer in-patien,t accommodation and 196C, 1370, and 1977 data. provide a limited range of medical facilities. Admissions per hospital bed - Total number of admissions to or discharges ENERGYCONSUMPTION PER CAPITA - Annual consumption of commercial energy from hospitals diviied by the number of beds. (coal and lignite, petroleum, natural gas and hydro-, nuclear and geo- thermal electricity) in kilograms of coal equivalent per capita. HOUSING AeAg sloe of household(persons per household)- total,urban, And rural- POPULATIONAND VITAL STATISTICS A household consist of a group of individuals who share living quarters Total population. mid-year (millions) - As of July 1; if not available., and their main meals. A boarder or lodger may or nay not be included in average of two end-year estimates; 1960, 1970, and 1977 data. the household for statistical purposes. Statistical definitions of house- Jrban population (percent of total) - Ratio of urban to total popula- hold vary. tion; different definitions of urban areas may Affect comparability Average number of persons per room - total, urban, and rural - Average num- of data among countries. ber of persons per room in all, urban, and rural occupied conventional Population density dwellings, respectively. Dwellings exclude non-permanent structures and Per sq. km. - Mid-year population per square kilometer (100 hectares) unoccupied parts. of total area. Access to electricity (percent of dwellings) - total, urban, and rural - Per sq. km. agriculture land - Computed as above for agricultural land CoEventional dwellings with electricity in living quarters as percentage only. of total, urban, and rural dwellings respectively. Population age structure (percent) - Children (0-14 years), working-age (15-64 years), and retired (65 years and over) as percentages of mid- EDUCATION year yopulation. Adjusted enrollment ratios Population growth rate (percent) - total, and urban - Compound annual Primaryschool - total, and female - Total and female enrollment of all ages growth rates of total and urban mid-year populations for 1950-60, at the primary level as percentages of respectively primary school-age 1960-70, and 1970-75. populations; normally includes children aged 6-11 years but adjusted for Crude birth rate (per thousand) - Annual live births per thousand of different lengths of primary education; for coontries with universal edu- mid-year population; ten-year arithmetic averages ending in 1960 and cation enrollment may emceed 100 percent since some pupils are below or 1970 and five-year average ending in 1975 for most recent estimate. above tho official school age. Crude death rate (per thousand) - Annual deaths per thousand of mid- Secondary school - total, and female - Computed as above; secondary educa- year population; ten-year arithmetic averages ending in 1960 and 1970 tion requires at least four years of approved primary instruction; pro- and five-year average ending in 1975 for most recent estimate. vides general vocational, or teacher training instructions for pupils .ross reproduction rate - Average number of daughters a woman will bear usually of 12 to 17 years of age; correspondence courses are generally in her normal reproductive period if she experiences present age- excluded. specific fertility rates; usually five-year averages ending in 1960, Vocational enrollment (percent of secondary) - Vocational institutions in- 1970, and 1975. clude technical, industrial, or other programs which operate independently Family planning - acceptors, annual (thousands) - Annual number of or as departments of secondary institutions. ucooptors of birth-control devices under auspices of national family Pupil-teacher ratio - primary, and secondary - Total students enrolled in planning program. primary and secondary levels divided by numbers of teachers in the corre- Family plasning - users (percest of married women) - Percosoage of sponding levels. tarried women of child-bearing age (15-44 years) who use birth-control Adult literacy rate (percent) - Literate adults (able to read and write) as devices to illmarried women in same age group. a percentage of total adult population aged 15 yours and over.

FOODAND NUTRITION CONSUMPTION Index ocdes number of por Passenger cars (per thousand population) - Passenger cars comprise motor cars capita annual production of all food commodities. seating lens than eight persons; excludes ambulances, hearses and military Per capita supply of calories (percent of requiremests) - Computed from vehicles. energy equivalent of net food supplies available in country per capita Radio receivers (per thousand population) - All types of receivers for radio per day. Available supplies comprise domestic production, imports less broadcasts to gesnral public per thousand of population; excludes unlicensed eports, and changes in stock. Net supplies exclude animal feed, seeds, receivers in countries and in years when registration of radio sets was in quantities used in food processing, and losses in distribution. Re- effect; data for recent years say not be comparable since most cocntries quirements were estimated by FAO based on physiological needs for nor- abolished licensing. sal uctivity and health considering environmental temperature, body TV receivers (per thousand opulation) - TV receivers for broadcast to genera .eights, age and uex distributions of population, and allowing 10 per- public per thousand population; excludes unlicensed TV receivers in coun- coot for waste at household level. tries and in years when registration of TV sets was in effect. Pot capita supply of protein (grams per day) - Protein content of per Newspaper circulation (per thousamd population) - Shows the average circula- casita net supply of food per day. Net supply of food is defined as tion of "daily general interest newspaper", defined as a periodical publi- above. Requirements for all countries established by USDA provide for cation devoted primarily to recording general news. It is considered ts a ninimcm allowace of 60 grams of total protein per day and 20 grams be "daily" if it appears at leant four times a week. Of ancmal and polse proteis, of which 10 grass should be animal protein. Cinema annual attendance per capita per year - Based on the number of tickets Those standards are lower than those of 75 grams of total protein and sold during the year, including ad.issions to drive-in dinems and mobile 23 grams of animal protein as an average for the world, proposed by units. MAC in the Third World Food Sur-ey. Per capita p-reisi upyio nia n us Protein supply cf food EMEPLOYMENT derivod from animals and puls is grams per day. Total labor fcrce (thousands) - Ec-nomicalpy active persons. including armed Caild (ages 1-4) mortality rate (per thousand) - Annual deaths per thous- forces and unemployed but e..ludi.ng housewives, students, etc. Defini- and in age group 1-4 years, to children in thio age group. tions in various countries are sot comparable. Female (percent) - Female labor force as percentage of total labor force. HALTP Agriculture (percent) - Labor force in farming, forestry, hunting and fishing Life expectancy at birth (Years) - Average number of years of life as percentage of total labor force. remaining at birth; usually five-year averages ending in 1960, 1970, Industry (percent) - Ltber force in mining, construction, manufacturing and and 1975. electricity, water and gas as percestage of total labor force. ILoc: mortality rat p housand) - Annual deaths of infants under Participation rate (percent) - total, male, and female - Total, male, and one year of ago per thousand live birhts. Female labor force as percentages of their respective populations. .iccess to safe water (percent of population) - total, urban, and rural - rhese tre LO's adjtused participstior rates reflecting ace-see Numbar of people (total, urban, and rural) with reasonable access to strurt-e of rho popiulticn. and long tine trend. cute u-uer supply (includes treated surface waters or untreated but Economic dependency ratio - Ratio of population under 15 and 65 ard over tc uroontaminated cater such as that fron protected boreholes, springs, the labor force in age group of 15-6l year-. and sanitary wells) as percentages of their respective populations. In au urban area a public fountain or standpost located not more INCOME DISITRIBUTION than 200 meters from a house may be considered as being within rea- Percentage of private income (both in cash and kind) received by richest 5 s-cable access of that house. In rural areas reasonable access would percent, richest 20 percent, poo-est 20 percent, and poorest 40 percent imply that the housewife or members of the household do not have to of households. spend s disproportio-ate part of the day in fetching the family's water seeds. POVERTY TARGET GROUPS Access tc excreta disposal (percent of population) - total, urban, and Estimated absolute pooectt income level (U0$ per capita) - arban and rural - rural - Number of people (total, urban, and rural) served by excreta Absolute poverty income level is that income level below which a minimal disposal as percentages of their respective populations. Excreta nutritionally adequate diet plus essential non-food requirements is nso disposal nay include the collection and disposal, with or without affordable. trestcent, of human excreta and waste-water by water-borse systems Estimated relative poverty income level (US$ per capita) - urban and rural - or the use of pit privies and similar installations. Relative poverty income level is that income level less than one-third Population per physician - Population divided by number of practicing per eapita personal income of the country. plysici-ns qualified from a medical school at university level. Estimated population below poverty income level (percent) - urban and rural - FPpulaticn per nursing person - Population divided by number of Percent of population (urban and rural) who are either "absolute poor" or practicing sale and female graduate nurses, practical nurses, and "relative poar" whichever is greater. assistant nurses. Economic and Social Data Division Economic Analysis and Projections Department - 23 -

ANNEXI. ECONOMIC DEVELOPMENT DATA Page 4 of (Anaunts in millions of U.S. dollars)

Actual Est. Projected 1970- 1974- 1978- 1974 1977 17 1979 1980 1983 1974 1978 1983 1974 1977 1983 NATIONAL ACCOUNTS Constant 1977 Prices Average Annual Growth Rates As Percent of GDY Gross Domestic Product 1656.5 2092.2 2298.6 2561.0 2848.5 3654.5 6.4 8.5 9.7 102.3 100.0 100.3 Gains from Terms of Trade (F) -37.0 - -21.4 -19.8 -22.0 -11.3 -2.3 - - .3 Gross Domeatic Income 1619.5 2082:2 2277.2 2541.2 2826.5 3643.2 6.5 8.9 9.9 100.0 100.0 100.0

Import (in-l.NPS)* 350.1 683.2 701.5 789.7 879.0 1082.9 9.8 19.0 9.1 21.6 32.7 29.7 Exports " (import capacI5fl* -280.6 -444.6 -435.3 -513.6 -590.9 -830.5 1.5 11.6 13.8 -17.3 -21.3 -22.8 Resource Gap 69.5 238.6 -. a6.2 276.1 288.1 252.5 4.3 11.4 6.9

Consumption Expenditures 1366.1 1814.4 1985.8 2187.5 2424.5 3133.5 5.9 9.8 9.5 84.4 86.7 86.0 Investment " (incl. stocks) 322.9 516.4 557.6 629.8 690.1 762.3 16.8 12.5 6.5 19.9 24.7 20.9

Domnestic Savings 253.4 277.8 291.4 353.7 402.0 509.9 16.7 3.5 11.8 15.6 13.3 14.0 National Savings 244.5 263.0 283.8 327.7 368.1 452.9 16.7 3.8 9.8 15.1 12.3 12.4

MERCHANDISE TRADE Annual Data at Current Prices As Percent of Total

Imports Food 14.4 12.7 10.4 10.4 10.8 14.5 23.0 -7.8 6.9 5.6 2.2 1.1 Other consumer goods 33.6 48,1 64.2 76.7 91.9 148.6 24.5 17.6 18.3 13.1 8.4 11.7 Intermediate goods 32.3 49.9 59.8 73.5 89.1 139.4 14.2 16.6 18.5 12.6 8.7 11.0 Fuels and lubricants 41.9 42.6 47.1 57.4 67.9 96.5 61.2 3.0 15.4 16.4 7.5 7.6 Capital goods 49.2 102.2 123.3 150.0 175.9 234.9 28.2 25.8 13.8 19.2 17.9 18.4 Unregistered imports 84.7 316.6 309.8 372.2 439.7 639.6 61.0 38.2 15.6 33.1 55.4 50.2 Total merchandise imports 256.1 572.0 614.6 740.2 875.3 1273.5 35.2 24.4 15.7 100.0 100.0 100.0

Exports Wood 24.7 19.9 19.5 22.7 29,1 53.6 10.6 -5.8 22.3 12.0 5.0 5.0 Beef 40.5 28.1 25.8 34.6 40.5 56.7 22.6 -10.7 17.1 19.7 7.0 5.2 Soybeans 20.4 58.8 41.5 61.5 72.8 141.0 90.5 19.4 27.7 9.9 14.6 13.0 Cotton 16.5 80.5 105.7 137.6 180.2 313.1 42.3 59.1 24.2 8.0 20.0 28.9 other cososodities 67.7 91.6 101.4 118.8 138.7 219.8 24.5 10.6 16.7 32.9 22.8 20.3 Unregistered exports 36.1 123.0 118.3 148.2 181.5 297.8 133.0 34.0 20.2 17.5 30.6 27.5 Total merchandise exports (fob) 205.9 401.9 412.2 523.4 642.7 1082.1 33.2 19.0 21.3 100.0 100.0 100.0

Merchandise Trade Indices Average 1977 100 Export Price Index 76.2 100.0 101.2 109.1 116.0 141.4 7.4 6.9 Import Price Index 88.3 100.0 106.2 113.3 120.3 143.3 3.8 6,2 Terms of Trade Index 86.3 100.0 95.3 96.3 96.4 98.7 Exports Volumoe Index 51.2 100.0 102.6 130.2 159.9 269.2

VALUE ADDED BY SECTOR Annual Data at 1977 Prices and Exchange Rates Average Annual Growth Rates As Percent of Total

Agriculture 580.4 713.7 777.7 847.7 924.0 1185.6 5.8 7.6 8.8 35.0 34.1 32.4 Industry and Mining 345.7 482.8 495.1 564.4 637.8 818.1 8.4 9.4 10.6 20.9 23.1 22.4 Services 730.4 895.7 1025.8 1148.9 1286.7 1651.0 6.0 8.9 9.9 44.1 42.8 45.2 Total 1656.5 2092.2 2298.6 2561.0 2848.5 3654.5 6.4 8.5 9.7 100.0 100.0 100.0

Actual Est. ProJected As Percent of GDP PUBLIC FINANCE (Current Prices) 1974 1977 1978 1979 1980 1983 (Central Administration) Current Receipts 128.4 209.4 261.9 291.0 343.3 524.6 9.6 1l.0 10.0 Current Expenditures 103.0 148.4 174.6 216.4 251.3 365.9 7.7 7.1 7.0 Budgetary Savings 25.4 61.0 87.3 74.6 92.0 158.7 1.9 2.9 3.0

CURRENT EXPENDITURE DETAILS DETAIL ON PUBLIC SECTOR 1979-83 (As X Total Current Expend.) INVESTMENT PROGRAM US$ millions X of Total Goods end Services 22.7 22.6 01.5 22.5 25.0 Infrastructure 589.5 33.2 Wages and Salaries 43.2 45.6 43.3 46.0 48.0 Productive Sectors 750.2 42.3 Transfer Payments 19.6 24.5 22.7 23.0 17.0 Social Sectors 270.4 15.3 Other 14.5 7.3 12.4 8.5 10.0 General Services 162.9 9.2 Total Current Expenditures 100.0 100.0 100.0 100.0 100.0 Total Expenditure 1773.0 100.0

SELECTED INDICATORS 1974-78 1978-83 FiNANCING

Average ICOR 2.6 2.5 Public Sector Savings 1006.3 56.7 Import Elasticity 2.2 1.0 External Finencing 766.7 43.3 Marginal Domestic Savings Rate 0.06 0.16 Internal Borrowing - - Mrginal National Savings Rate 0.07 0.12 Total Financing 1773.0 100.0

LABOR FORCE AND Economically Active Population Employment Shares OUTPUT PER WORKIER Proj. 1962-74 1974-76 1976-80 (in percentages) 1962 1974 1976 1980 Growth Rate Growth Rate Growth Rate 1962 1974 1976 1980

Agriculture 321,333 425,633 451,554 514,170 2.4 3.0 2.6 56.1 52.1 52.4 53.0 Industry 107,588 162,974 168,474 195,461 3.5 1.6 3.8 18.8 20.0 20.5 22.0 Services 143,966 227.617 242.884 268144 3.9 3.3 2.6 25.1 27.9 27.1 25.0 Total 572,887 816,224 162,912 978,715 3.0 2.8 3.2 100.0 1O0.0 100.0 100.0

* Includes -nregisterecd merchandise. ** Includes financial iavestment in agriculture and ind,ustry. not applicable a staff estimate not available - nil or negligible ..not available separately -- less than half the but included in total smallest unit shown - 24 -

ANNEX I Page 5 of 5 BALANCE OF PAYMENTS, EXTERNAL ASSISTANCE AND DEBT (amounts in millions of U.S. dollars at current prices)

Actual Estimated Projected 1974 1976 1977 T 1979 1980 1983

SUNMARY BALANCE OF PAYMENTS

Exports (incl. NFS) 238.8 287.6 444.6 462.4 582.2 711.4 1191.0 Imports (incl. BFS) 309.1 459.6 683.2 745.2 895.2 1058.2 1533.0 Resoorce Balance (X-M) -70.3 -172.0 -238.6 -282.8 -313.0 -346.8 -362.0

Net Factor Payments -12.7 -15.1 -15.6 -32.2 -34.0 45.7 -88.3 Current Tramsfers (net) 6.9 24.2 23.1 4.0 4.4 4.8 6.4 Balance on Current Accounts -76.1 -162.9 -231.1 -311. -342.5 -387.7 -444.0

Private Medims and Long Term Capital 53.7 75.0 86.3 99.2 114.1 158.7 N.et Capital from Binational Entities 1.5 149.0 240.0 180.0 200.0 85.0 Public M< Loans Disbursements 24.7 58.7 106.6 133.3 129.3 147.9 296.9 -Repayments 10.5 11.7 16.1 52.5 46.9 141.4 230.5 Net Disbursements 14.2 47.0 90.5 80.8 82.4 106.5 66.4

Short Term Capital Flows and Errors and Omissions 47.7 18.0 25.5 34.0 - - - Change in Net Reserves -41.0 -50.1 -108.9 -130.0 -19.1 -32.9 -30.3 (- increase) GRA.NTAND LOAN COMMITMENTS DEBT AND DEBT SERVICE 1974 1976 1977 Official Greets & Grant-like Public Debt Out. & Disbursed 149.3 221.5 317.1

Public M< Loans Interest on Public Debt 5.5 7.3 10.0 IBRD 24.5 12.0 38.0 Repayments on Public Debt 10.5 11.8 16.1 IDA 11.0 4.0 - Total Public Debt Service 16.0 19.1 26.1 IDB 11.5 2.3 11.0 Govesrnents 6.6 11.0 17.0 Burden en Export Earnings ('.) Suppliers 16.3 10.1 13.4 Public Debt Service 6.7 6.6 5.9 Financial Institutions 27.0 3.7 16.0 Total Public M< Loans 96.9 43.1 95.4 Term Structure of Public Debt Coommireets Average Interest (°I) 6.1 6.5 6.8 Actual Debt Outstanding on Dec. 31. 1977 Average Maturity (years) 23.1 18.4 16.7 EXTERNAL DEBT Disbursed only Percent Average Grace (years) 4.8 4,2 4.1 World Bank 28.0 8.8 Grant Elment (7.) 28.5 23.3 18.9 IDA 33.8 10.7 IDB 21.4 6.8 IBRD Debt Out. & Disbursed 15.0 21.7 28.0 G-vernments 123.3 38.9 " as 7, Public Debt O&D 10.0 9,8 8.8 Suppliers 28.4 8.9 " as 7. Public Debt Service 9.3 10.8 9.7 Financial Institutions 82.1 25.9 Total Public AI<Debt 317.0 100.0 IDA Debt Cut. & Disbursed 25.5 28.7 33.8 as 7 Public Debt O&D 17.1 12.9 10.7 as 7.Public Debt Service 1.9 2.1 1.6

.ot applicable e staff estimate -. eat available - oil or segligible .. t a-ailoble separotoly -- less thba half the but included is total smallest .sit shbss - 25 - - 25 - ~i ~~~~ANNEXII Page 1

STATUS OF BAkNKGROUP OPERATIONS IN PARAGUAY

A. Statement of Bank Loans and IDA Credits (March 31, 1979)

------(US$ million)…------Loan or Amount (less cancellations) Credit No. Year Borrower Purpose Bank IDA Undisbursed

Six loans and four credits fully disbursed 21.8 25.7 1/ -

347 1972 ParaguaLy Secondary Education - 5.1 0.2 1037 1974 Paraguay Livestock IV 10.0 - 0.3 509 1974 Paraguay Small Farmer Credit and Rural Development - 11.0 2.7 1059 1974 Paraguay Highways IV 14.5 - 4.1 587 1975 Paraguay Preinvestment Studies - 4.0 2.5 1252 1976 Paraguay Vocational Training 4.0 - 2.6 1346 1976 Paraguay Rural Education 8.0 - 8.0 667 1976 Paraguay Rural Education - 4.0 2.9 1418 1977 Paraguay Rural Development II 22.0 - 20.8 1419 1977 Paraguay Industrial Credit 10.0 - 8.2 1502 1977 Paraguay Rural Water Supply 6.0 - 6.0 1529 1978 Paraguay Highways V 33.0 - 33.0 1674 2/ 1979 Paraguay Livestock and Agricultural Development 25.0 - 25.0

Total (net of cancellations) 154.3 49.8 of which has been repaid 8.3 1.0

Total now outstanding 146.0 48.8

Amount sold 1.3 of which has been repaid 0.3 1.0

Total now held by Bank/IDA 145.0 48.8

Total undisbursed 117.1

1/ Includes exchange adjustment.

2/ Approved on March 22, 1979; Loan Agreement signed on April 6, 1979. - 26 -

ANNEXII Page 2

B. Statement of IFC Investments - March 31, 1979

Type of (Amount in US$ million) Year Obligor Business Loan Equity Total

1974 FINAP, S.A. Wood Processing 4.4 1.0 5.4

Total gross commitments less cancellations, terminations, repayments and sales 4.4 1.0 5.4

Total undisbursed - - - - 27 - ANNEX II Page 3

C. PROJECTS IN EXECUTION 1/

Credit 347-PA First Education Project, US$5.1 million, December 22, 1972; (Date of Effectiveness: October 30, 1973; Closing Date: December 31, 1979).

Project implementationis proceeding in a satisfactorymanner. Of the nine project institutions,seven are completed and the remaining two are almost completed. All completed schools are fully equipped and furnished, and the equipment for the resmainingtwo schools is being purchased. Imple- mentation of the technical assistance componentwas satisfactorilycompleted in March 1978. Total project cost is expected to exceed the appraisal estimate by about 16%, but no difficulty in provision of the required counterpartfunds is foreseen. The whole project is expected to be completedby the original closing date of December 31, 1979.

Loan 1037-PA Fourth Livestock Project, US$10.0 million, September6, 1974; (Date of Effectiveness: February 21, 1975; Closing Date: August 31, 1979).

Disbursementsof the loan proceeds have been in line with appraisal projections,but project induced production,productivity increases and ranchers' income are likely to remain substantiallybelow appraisal expec- tations due to a prolongedperiod of unfavorablebeef prices and prevalence of extensive herd and ranch management practices. Over the last year, progress was made in improving technical services to ranchers and in debt collection (increasingthe recovery rate from 76% in 1976 to 85% in 1977). A consultant to train the executingagency's staff in project monitoring and subloan evaluation has been hired; to permit making final payments to this consultant,the loan's closing date has been extended from February 28, 1979 to August 31, 1979.

Credit 509-PA Small Farmer Credit and Rural DevelopmentProject, US$11.0 million, September 6, 1974; (Date of Effectiveness: April 14, 1975; Closing Date: June 30, 1979).

The project credit component is proceeding satisfactorilywith medium- and long-term lending in line with appraisal estimates. Lending of short-termfunds, after the transfer of US$1,000,000from Category 4 (short term) to Category 3 (medium and long term) of Schedule 1 of the Credit Agree- ment is now completed. Land titling also continues to be satisfactory,with about 2,000 titles distributed. Efforts to help strengthen BNF's Agricultural

1/ These notes are designed to inform the ExecutiveDirectors regarding the progress of projects in execution,and in particular to report any problems which are being encountered,and the action being taken to remedy them. They should be read in this sense, and with the understandingthat they do not purport to present a balanced evaluation of strengthsand weaknesses in project execution. - 28 - ANNEX II Page 4 of 6 and Livestock Department are continuing. The 18 schools planned are now constructed,furnished, staffed and fully operating. The three health centers constructedunder the project have been supplied with medical equipmentand are fully operational;and the three community centers have been built and have been handed over to the Ministry of Agriculture for administration. Earth road constructionis now 85% completed (40 km) and all-weatherroad construction is 22% completed (8 km).

Loan 1059-PA Fourth Highway Project, US$14.5 million, December 12, 1974; (Date of Effectiveness: March 11, 1975; Closing Date: June 30, 1979).

Work on one project road (Mbocayaty-ColoniaIndependencia) was completed in July 1978 or about ten months behind schedule;progress of works on the other project road (Encarnacion-Pirapo)is about 73% against the scheduled 100%; completionis now scheduled for March 1980. Delays were caused by poor managementand insufficientequipment; corrective measures were taken. The consultingfirm engaged for assisting in highway maintenanceand for preparing a study on maintenanceneeds has completedits task. The latter study was the basis for the subsequenthighway loan (FifthHighway Project - Loan 1529-PA).

Credit 587-PA PreinvestmentStudies Project, US$4.0 million, October 17, 1975; (Date of Effectiveness: April 15, 1976; Closing Date: December 31, 1980).

Although the entire amount of the credit is now virtually committed,progress on the institutionbuilding side is still slow. The Governmentis attemptingto simplify the formalitiesinvolved in processing sub-projects,and although the execution of the latter is now speedier,this aspect will require continuedattention during the disbursementphase.

Loan 1252-T-PAVocational Training Project, US$4.0 million, May 13, 1976; (Date of Effectiveness: August 26, 1976; Closing Date: June 30, 1980).

Project implementationis on schedule. Constructionof four of the six institutionshas started. The designs for the other two are being prepared. Furniture contracts for two institutionsand all equipment contracts have been signed. The technical assistanceprogram is satisfactoryand running smoothly. Project cost estimatesare within appraisal estimates,so far.

Loan 1346/ Third Education Project, US$4.0 million Credit and US$8.0 Credit 667-PA million Loan, December 22, 1976; (Date of Effectiveness: March 4, 1977; Closing Date: June 30, 1981).

Project implementationis about six months behind schedule due to initial lack of counterpartfunds. However, under a revised implementation schedule the project is expected to be compl.etedby the present closing date - 29 - ANNEX II Page 5 of 6

of June 30, 1981. About 10 associated rural primary schools are completed. Constructionof 43 new rural primary schools as well as of five lower secondary schoolshas been contracted. Satisfactoryprogress has been made in contractingtechnical assistance specialistsand in implementingthe textbook production and in-serviceteacher training programs. With regard to total project cost, at this time no cost overrun is foreseen.

Loan 1418-PA Second Rural DevelopmentProject, US$22.0 million, May 18, 1977; (Date of Effectiveness: January 17, 1978; Closing Date: December 31, 1981).

Lending under the project has reached US$1,350,000,or about 47% of appraisal estimates. Land titling is also progressing slowly,with 600 titles disl:ributed,or 50% of appraisal estimates. Engineeringconsultants for roads and communitycenters have started work. Engineeringfor health centers and1posts has started and constructionwill begin shortly. A new project coordinatorhas been appointed, and the deputy project coordinatoris now operating from the project area. Also, the project document for the supportingUNDP-financed program of technical assistance,for which the Bank will act as executingagency, has been signed and a chief technicaladviser and an agrDnomist are alreadlyoperating in the project area. Cofinancing arrangementswith the Federal Republic of Germany are being finalized.

Loan 1419-PA IndustrialCredit Project, US$10.0 million, May 18, 1977; (Date of Effectiveness: January 17, 1978; Closing Date: September30, 1982).

One of the main objectives of the Project was BNF's financial and institutionalrehabilitation. Satisfactoryprogress has been made *towardsme'eting this objective,with BNF obtaining operatingprofits (¢ 155 million irL1977 and 0 159 in 1978) for the first time since 1972. This was achieved in part due to a reduction in operating costs, a higher financial spread, and a capital contributionof 0 1.3 billion that the Governmentmade under the Loan. BNF's debt recovery efforts, however, have not yet been sufficietlyeffective in decreasing the level of arrears. To accelerate the institutionalimprovements, on the other hand, the UNDP-financedtechnical assistance program has been expanded by incorporatingexperts in agricultural programming,portfolio manaLgement and electronic data processing systems. Regarding the financingof industrialprojects under the Loan, BNF has submit- ted to the Bank more than 30 subprojectswith small-scaleenterprises account- ing for most of them. Disbursements,however, were running somewhat behind schedule. Since BNF has already met most of the conditions for releasing the second tranche (US$6.0million) under the operation, an additionalUS$2.0 million have been made available to finance subprojects. - 30 - ANNEX II Page 6 of 6

Loan 1502-PA Rural Water Supply Project, US$6.0 million, December 16, 1977; (Date of Effectiveness: July 13, 1978; Closing Date: June 30, 1982).

The project is delayed six months due to longer than forecasted time to fulfill effectiveness conditions (approval by the Paraguayan Congress of the Legal Documents and signature of the agreement for technical assistance between PAHO and SENASA, the executing agency), but implementation is proceeding at a good pace. Engineering, including bidding documents, for 43% of project communities, is completed. The condition of disbursement for equipment pur- chases has just been met on the basis of the signing of contracts between SENASA and 10 communities and the preparation of a satisfactory purchase program.

Loan 1529-PA Fifth Highway Project, US$33.0 million, March 17, 1978; (Date of Effectiveness: December 5, 1978; Closing Date: June 30, 1983).

Effectiveness of the Loan Agreement had been delayed by Govern- ment legal procedures to approve the cofinancing documents. The Borrower is contracting the two civil works elements and has initiated execution of the technical assistance component, and for procurement of road maintenance equipment.

Loan 1674-PA Livestock and Agricultural Development Project, US$25.0 million, April 6, 1979; (Closing Date: June 30, 1984).

This loan has not yet become effective. - 31 -

ANNEX III Page 1 of 2

PARAGUAY

SIXTH HIGHWAY PROJECT

SupplementaryProject Data Sheet

Section 1.- Timetable of Key Events

(a) Time taken to prepare the project: About 18 months

(b) Preparationby: Ministry of Public Works and Communications with followingf'inancing: Government of Brazil assistance to Paraguay for Route No. 6; Loan 1529-PA (Fifth Highway Project) for the feeder roads; and Credit 587-PA (Preinvest- ment Studies Project) for agriculturalstudies related to the road components.,

(c) First presentat:Lonto the Bank: In early 1978 on the basis of (i) a review of the UNDP-financed(with the Bank as executing agency) Transport Survey (1973), transport survey (1977); and (ii) findings of the Bank "Regional Developmentin Eastern Paraguay" report (1978).

(d: First Bank mission: April 1978

(e) Appraisalmission departure: February 1979

(f) Negotiations: May 1979

(g) Planned date of effectiveness: September 1979

Section II - Special BankcImplementation Action

None.

Section.III - Special Conditionsof the Bank Loan

(a) Loan disbursementsfor civil works would be conditionedon US$3.5 million of the co-lender'sloan having been utilized for the project (paragraph44). Other conditions of disbursementwould be: (i) for the Feeder Roads component, the establishmentof the Feeder Roads Unit and appointmentof initial staff (paragraph47); and (ii) for the Transport Planning component, filling of three vacant positions within the Off'iceof Coordinationand Integral Planning (OCIPT) on the basis of standardsacceptable to the Bank (paragraph48). - 32 -

ANNEXIII Page 2 of 2

(b) Over the period 1980-1984, the Government will (i) not under- take investments in Presidente Carlos Antonio Lopez' permanent way and rolling stock without prior review by OCIPT; and (ii) will inform the Bank of any proposed investment of more than US$5 million in any given year (paragraph 23).

(c) Proper maintenance of the national highway network would be ensured on the basis of agreed budgetary allocations (paragraph 28).

(d) Full staffing of the Feeder Roads Unit would be completed by September 30, 1980 (paragraph 47).

(e) By December 31, 1980, the Government would adopt a plan of action satisfactory to the Bank for achieving adequate permanent staffing of the Directorate General of Highways by June 30, 1982 (paragraph 43).

(f) The cadastral survey of Alto Parana (south of Route 7) and Itapua Departments would be completed by December 31, 1980 (paragraph 35). 0 z

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